This is Not a Good Sign for the Stock Market

 

This is Not a Good Sign for the Stock Market

Money managers are always looking for signs.  Signs that tell us about the road ahead.  This one sign is not a good sign for the stock market.   CNBC had a very telling story first published by the Financial Times.

The story looked at only 8 major fund houses and found that collectively these companies lost over 700 billion dollars in assets in the third quarter.  Said another way, investors pulled out 100’s of billions of dollars in the third quarter.  What prompted such drastic selling?  Did the stock market crash?  Did we enter a bear market?

Investors reacted to a grand total of a -8.8% loss during the third quarter.   If you are investing in stocks, any investor should be able to stomach up to a -20% loss at any given time.  That is the maximum loss during a “normal” correction.  If investors were selling that much because of a -8.8% loss, how would they react if a normal correction of -20% occurred?

Investor psychology definitely has changed.  That is not a good sign for the stock market. Historically investors would stay invested during tough markets.  Today, investors are shooting first and asking questions later.  I am not saying that selling out of mutual funds is a bad thing.  I am all for it if there is an intentional strategy behind it.  Unfortunately, this seems like emotional selling to me.  Selling because of fear is the worst reason to ever sell an investment.

With the internet and the 24 hour news cycle, there are many opportunities to stoke the fears of investors.  This article by the financial times is a good example. They refer to August 24th as “Black Monday” because the stock market decline almost 4% during the morning hours.  No, Black Monday was October 19, 1987 when the stock market declined -22% in one day.  Investors hear Black Monday and assume the worst is happening.

Then there are all of the videos circulating around predicting the end of times.  What investors don’t realize about these videos such as the one conducted by Ron Paul, is that they are backed by Porter Stansberry whose sole purpose is to sell you a newsletter and uses fear marketing to accomplish that sell.

If you are a market investor, what you don’t want to see is a great deal of selling by the masses.  The next time the market sees a real, large decline, we might see the domino effect of selling by the everyday investor.  That would not be a good sign for the stock market

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